From humble beginnings, the video game industry has grown to become a global phenomenon with revenues approaching $60 billion a year – and that excludes mobile games on smartphones and tablets. If you take these into account, it is projected that 2013 industry sales will reach $66 billion, and will grow to $78 billion by 2017. Perhaps the best evidence of this is the recent release of Grand Theft Auto V, which appears to have generated approximately $1 billion of sales in its first three days on retail shelves. These figures eclipse what has been seen from Hollywood blockbusters such as Avatar – and, indeed, worldwide video game revenues are nearly twice Hollywood’s global box office take.
Of course, the cost of developing these games is also high, as is the risk – Grand Theft Auto V cost a staggering $265 million to make. Not only are a huge number of people needed to make these games, there is also the cost of motion capture systems, render farms, custom animation software development and workstations. However, given the amount of money that the industry is turning over, you wouldn’t expect governments in places like Canada, the United States and the UK to give them massive subsidies. And yet, that is exactly what is happening.
If you look at the United States, businesses such as Electronic Arts – based in Redwood City, California – are able to benefit from enormous tax incentives, including credits, write-offs and deductions. While these subsidies were not designed specifically for the video game industry, they might have been tailor made for them. In fact, video game developers are able get bigger tax breaks than other industries because they combine aspects of software development, online retailing and entertainment. Unlike companies such as Adobe that only fit in one category, video game developers can combine tax breaks for all three, making them one of the most heavily subsidized industries in the United States.
Companies such as Electronic Arts are of course entitled to take all of the tax breaks due to them and to lobby on the Hill for more – which they have successfully done. However, it is instructive to look at exactly what this has contributed to their bottom line. Between 2006 and 2010, EA turned an operating profit of $1.2 billion – a fact freely admitted by the company’s management. On the other hand, over the same period EA actually reported a net loss despite the massive operating profit. When you look at the tax they paid worldwide – not just in the United States – this only amounted to $98 million for that five-year period. This is approximately 8% of total operating profit, compared to the US corporate tax rate of 35%.
Of course, the US is not alone in subsidizing the video game industry, and it is alleged that companies in the sector have threatened to move operations offshore in order to extract concessions and maintain existing subsidies. In other words, the video game industry is adept at playing off the economic interests of different national governments in order to gain financial advantage.
Canada is a good example of a country that is making a substantial play for video game industry jobs. Recently, Ubisoft, the French video games giant, announced that it was expanding its 3000 strong workforce in the Canadian province of Québec by another 500 workers. As part of this deal, the Québec government cut a check to Ubisoft to the tune of nearly $10 million. This is in addition to the subsidies that are already available for video game developers in Québec – these are actually more generous than those in the United States. And Québec is not alone in offering these types of incentives in Canada – for instance, neighboring Ontario also provides similarly attractive tax breaks.
The UK is also actively pursuing video game developers, although it appears to be running afoul of EU regulators. Back in December, 2012, George Osborne, the British Chancellor, announced a program which would see 25% tax relief on up to 80% of a game’s total development cost – provided that the money was spent in the UK. Osborne described the program as being “among the most generous in the world” at the time. However, EU regulators said in April that they were going to investigate the planned tax relief, stating that such programs should only be put in place when there is an obvious market failure that needs to be addressed – which is difficult to argue when it comes to the video game industry.